Executives were handed the cash after HBOS was rescued by Lloyds TSB and the takeover formally activated a "change of control" clause in their contracts.

The decision to hand over the cash will fuel a mounting row over the pay of bankers in institutions being bailed out with taxpayer funds. There is growing speculation in Westminster that the government will be forced to follow Barack Obama in the US and impose pay restrictions on bank executives who have sought bailouts.

It comes as millions of pounds of bonuses are about to be paid to employees who remain at Royal Bank of Scotland. The cash payments at HBOS were made at the discretion of the bank, which has received £11bn of taxpayer funds and been folded into the Lloyds Banking Group.

The bank is understood to have allowed share-based performance schemes to pay out in cash rather than shares. Such schemes might more ordinarily roll into the shares of the new company.

The directors are thought to have received 10% of the value of the shares at the time they were granted, rather than their current value. Some of the shares were granted at £11 but were valued at less than 70p when the rescue takeover went through.

While chief executive, Andy Hornby, was quick to refuse any contractual payoffs he was entitled to when he was ousted by the Lloyds management, shareholders will be incensed to learn that he was in line to receive other cash payments. Hornby may have received around £250,000 as a result of the share schemes being cashed in.

It has also emerged that some boardroom directors took contractual payoffs. Peter Cummings, the long-standing executive who ran the corporate bank which has run up vast losses, is understood to have held the bank to his contractual terms. He was entitled to one year's salary - in 2007 he earned £600,000 before £1.6m of bonuses.

HBOS declined to comment on details of its pay schemes. A spokesman said: "We never comment on individual remuneration arrangements.

"It is a matter of law that employees at every level have a legal right to their contractual entitlements. HBOS would be no different to any other company on that point."

The bank made its decision knowing that Hornby and his boardroom colleagues had ploughed all of their cash bonuses in to the bank's shares - and had seen their value wiped out.

The thousands of HBOS staff who have bought shares through save-as-you-earn schemes are thought to have had their investments rolled over into shares in the new Lloyds bank.